Domestic Mutual Funds' Nifty 50 Allocation Drops to 21-Year Low in September Quarter

Domestic mutual funds’ allocation to Nifty 50 stocks declined to a 21-year low in the September quarter, slipping below 50 percent for the first time in over two decades. Fund portfolios continued to expand beyond the country’s largest benchmark companies during the period, according to the National Stock Exchange’s (NSE) India Ownership Tracker report.

The share of Nifty 50 stocks in mutual funds’ holdings of National Stock Exchange (NSE)-listed equities dropped by two percentage points to 49.4 percent, down from 51.4 percent in June. This figure marks a significant shift from its peak in December 2019, when Nifty 50 stocks accounted for 63 percent of holdings, representing a decline of 13.5 percentage points over that period.

This contraction formed part of a broader trend among institutional investors. Their combined allocation to Nifty 50 companies fell for the third consecutive quarter, reaching a record low of 54.6 percent. This reflected a decline of 1.4 percentage points during the quarter and 6.3 percentage points since December.

The NSE noted that the sustained decline across investor categories reflects the ongoing broadening of institutional portfolios beyond India’s largest listed companies. However, the drop in Nifty 50 allocation does not indicate that mutual funds are moving away from large companies altogether. Exposure to the largest 10 percent of listed companies by market capitalization actually increased by 4.2 percentage points to reach 87.6 percent during the quarter. This growth was largely driven by higher exposure to companies outside the Nifty 50, particularly mid-cap stocks within this top tier.

Other market participants similarly increased their allocations to the top market-capitalization group. Foreign portfolio investors (FPIs) and individual investors raised their allocations by 2.8 and 4.1 percentage points, respectively.

Performance metrics over the three-year period ending September showed the Nifty 50 delivering annualized returns of 4.8 percent. In comparison, the Nifty Midcap 150 generated returns of 13 percent, while the Nifty Smallcap 250 returned 13.3 percent.

Concurrently, FPIs reduced their Nifty 50 allocation by 1.3 percentage points to a record low of 56.2 percent. Banks, financial institutions, and insurers maintained the highest concentration in these stocks, though their allocation also decreased to a record low of 62.4 percent. Despite these reductions, overall institutional exposure to Nifty 50 companies remained relatively high, given that these stocks accounted for 39.5 percent of the total market capitalization of NSE-listed companies.

The trend toward portfolio diversification was further highlighted by the NSE’s portfolio concentration index, which measures how investments are distributed across a limited number of stocks. The index for domestic mutual funds fell to a 35-quarter low of 119, while the overall institutional index declined from 145 in June to a record low of 132 in September.

"The drop in Nifty 50 allocation by domestic mutual funds highlights a clear shift in investment strategy toward broader market opportunities, particularly mid-caps. While institutional investors remain heavily invested in large-cap companies overall, the search for better annualized returns over the past three years has naturally encouraged portfolio diversification beyond the primary benchmark index." — Dr. Shishir Gupta, Founder & CEO, StartupLanes